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May 1, 2018

Handing over P75(I) submarine project to Mazagon will sound death-knell for private players

The Indian Navy’s reported decision to nominate Mazagon Dock
Shipbuilders Ltd (MDL) to execute the $8 billion Project-75 India
[P-75(I)] to build six advanced submarines has left private contenders
gasping for breath. The P-75(I) programme was once the biggest rays of
hope for the private sector, especially companies like Larsen &
Tubro and Reliance Naval that were gearing up for orders under the
programme announced in October 2014. The private shipyards — L&T’s
at Kattupalli and Reliance Naval’s at Pipavav — currently have turnovers
of under Rs 1,000 crore and have slipped into the red.

The
private sector in India has less than 5 per cent (about Rs 5,000 crore
annually) share of direct orders from the Defence Ministry for
manufacturing. “The expectation was that the private sector’s share will
rise to almost 25 percent in the next three-four years,” Vice Admiral
(Retd) Shekhar Sinha told BTVI.

Sinha said the private players
should be integrated into the country’s defence manufacturing sector
that was liberalised way back in 2001 and opened up participation to not
just private players but also to foreign entities. “Make in India is
impossible without the participation of the private sector,” said Sinha.

Last
May, India cleared a long-awaited policy to push local defence
manufacturing by effectively picking industry champions that would tie
up with foreign players to make submarines, fighter jets, helicopters
and armoured vehicles. The decision came after Prime Minister Narendra
Modi vowed to end India’s role as the world’s largest arms importer by
asking foreign firms to share technology with local players and then
manufacture in India — in return for a slice of the $250 billion
analysts claim the country would spend on its armed forces over the next
decade.

The government, under the “Strategic Partnership” model,
would shortlist and then pick Indian companies to join forces with
foreign firms. The winners were guaranteed billions of dollars of orders
to incentivise them to manufacture. “For each platform, one private
sector strategic partner will be chosen,” then Defence Minister Arun
Jaitley had told reporters after a cabinet meeting at that time. “You
don’t set up a manufacturing facility if you don’t have any hope of
getting orders.”

The Defence Ministry had thereafter drafted its
out-of-the-box Strategic Partnership model by building on
recommendations of several expert committees and groups. And private
players were an integral part of the plan. “Everyone hoped the P75(I)
project will come to the private players but it seems that the plan is
now shelved,” added Sinha.

Former navy chief Admiral Vishnu
Bhagwat said it was imperative for the government to include private
players in defence manufacturing. “I am shocked at the decision. During
my tenure I had drawn up a 30-year plan and given it to (the then)
Defence Minister. In India, very sadly, the Ministry of Defence and its
procurement team hardly understand their business,” Bhagwar told BTVI.

Agreed
strategic expert C. Uday Bhaskar, who felt the decision would prove
“disastrous” for the country in the long run. “India knows the public
sector has not delivered in the defence sector and in the shipbuilding
sector, where foreign participation is a must. The private sector was
encouraged to get into this sector; many acquired and developed
infrastructure so that they can be considered relevant for business from
the government. And now we hear that the decision has gone — again — to
a PSU known for its delays,” Bhaskar told BTVI.

Defence
manufacturing in India is small and dominated by PSUs, many of which
have been criticised for poor performance. Private firms such as Larsen
& Toubro, Mahindra Group, Tata Group and recent entrants Reliance
Group and Adani Group are trying hard to seek orders. One of the aims of
involving private players was to create submarine-building capabilities
outside of the state-owned shipyards that were known for cost and time
over-runs.

In 2016, the Indian Navy issued a Request for
Information (RFI) to six global submarine makers seeking to build six
advanced submarines with air-independent propulsion (AIP) technology
that enables them stay under water for longer periods. The six companies
were ThyssenKrupp Marine Systems (Germany), Naval Group (France),
Navantia (Spain), SAAB (Sweden), Rubin Design Bureau-Amur Shipyard
(Russia and Italy) and Mitsubishi Heavy Industries and Kawasaki Heavy
Industries (Japan). This was around October 2017, when Jaitley headed
the Defence Ministry.

The Defence Ministry then drafted
Expressions of Interest (EoI) to be issued to the private sector
shipyards in India so as to select the local Strategic Partners. But in
less than a year’s time, new Defence Minister Nirmala Sitharaman has
decided to dump that process. Officials of Indian Navy did not explain
reasons for reversing the original plan, first mooted by Manohar
Parrikar when he was the Defence Minister.

At a meeting chaired
by the Sitharaman in late March, it was decided that the P75(I)
programme would not be rolled out under the Strategic Partnership Policy
of the Defence Procurement Procedure 2016, as initially decided, and
would be handed over to MDL on a “nomination basis”.

The
decision, taken less than a month after the visit to India by President
Emmanuel Macron, is being viewed as a positive one for the French
shipbuilding conglomerate Naval Group, which already has a collaboration
with MDL under which it is currently building six Scorpene Class
submarines. The first of these has been launched and the rest are to be
commissioned by 2020.